Wednesday, February 11, 2009

Total Economic Collapse

Many in the business world are telling me it is unfolding very rapidly. Wave of panic layoffs in progress.

Last month's official unemployment rate was 14% (counting those who've given up looking for work). That is probably rosy, and old, so we have at least 15% out of work right now. At the current rate of 1 million layoffs every 6 weeks, not counting clear acceleration of the downturn, it looks like we should pass the Great Depression peak UE rate of 24% in six months to a year, or so.

Curious as to what others are seeing...


  1. OutAndIn here -

    Still thinkin gold is pretty. I think it's just the way it shines.

    You can't call for a "Total Economic Collapse" and talk down on gold. Sorry :(

    Other than your view on that, I agree 100% with most of what you say :)

  2. Total economic collapse is acutely bearish for all prices. Every depression we've ever had has been hyperdeflationary.

    I've always advised to hold some physical gold as a wildcard insurance policy, with the full intent of losing money to the cost of buying a policy. It remains to be seen how we will collect our own life insurance policy, if chaos ultimately rules the day.

    Barring a systemic snap that makes most if not all trades null and void, gold prices will plummet (gold value will spike higher) along with all prices, just the opposite of gold's rocketing higher during the mindset of "endless prosperity" leading up to 2007/8.

  3. Still curious as to what others are seeing with regard to layoffs accelerating extremely rapidly...

  4. Here in our city unemployment is supposedly not nearly as bad as the national average, but in my neighborhood block is a recently-fired executive (probably 400K salary) of a sporting goods company; my next-door neighbor couldn't sell her 7000 sf home she bought in 2004 for $750K and is renting it instead for $2500/mo.

    Fellow behind me and up a few houses left the country after his house was discovered having an illegal casino in the basement; he and his wife are divorcing and the house is for sale. Guy across the street got set to jail about 6 years ago for securities fraud and embezzlement from the company he was running and now a evangelistic preacher lives there. Last lot in our subdivision being built two doors down by a guy who self-describes himself as a being in the refinery construction business. (around 800K) Interesting neighnobhood.
    So far my job is secure, but a recent lateral career move had me reassessing my field's opportunities, and I was surprised how much tighter the market has become in just the last few months. Jayhawk1

  5. My area has seen quite a few lay-offs recently, although my company has not had any. I have noticed our orders go down in January and early February (versus forecast), and I suspect the aftershocks are just hitting us.

  6. Agree on paper gold. I'm planning to go for the short as we approach 1K, which would form a nice double top.

    guru1 from MW

  7. OutAndIn:

    In my area (So Cal) layoffs are almost expected. I know people in the school system that are looking for other jobs...and they can't find any....

    The prisons are being emptied (no funds to care for inmates)

    If the furloughs didn't hit us, the State layoffs surely will (10,000+)

    I know of fast food restaraunts getting 400-600 applications per week.

    Things are bad.

  8. On the layoff topic, quite a few good paying jobs were lost during the last few months as result of some restructuring on a competiting bank.

    The bank where I work has also been tightening the belt and most expenses have been minimized to the maximum. Unfortunately, these measures also resulted on job losses.

    The greatest impact of the economic slowdown has been reflected on the foreclosures of homes on the most credit risk / economic sensitive areas of town (recent developments mostly absorbed by subprime credits).

    Some of these houses are being currently being sold (after foreclosure) at 25% to 40% less than what they were originally sold.

  9. We have a small company in Colorado, in business for over 30 years. Never have laid anyone off for lack of work. We could lay off a third of our employees, and handle current business easily. We'll probably hold off until this summer, making changes at the business to occupy employees time, painting, arranging, etc.

    Our customers are quitting, closing their doors, some even moving back to rural areas. A few that do come in are very worried, scared, mad at the government, the banks, maybe even a little at themselves.

    I grew up dirt poor in the 50's, I've seen tough times, I've never been this worried before. I'm not sure if we can suply the food needed, or if society, today, can handle what I believe is coming. I sincerely hope I'm wrong.

    I personally am disgusted with the leadership in this country, I am disgusted with the notion of Political correctness, that we lived with for too long. I know, two different issues, but they went hand in hand.

    FDR, I have a great appreciation, for your effort, and thoughts on our current situation.

  10. I work for a global mega outsource shop that does it all, management consluting, outsourcing, business development, you name it all.

    We're still hiring people both in U.S. and overseas, namely India and Phillipines. We have several operation centers in India and it is still hard to retain employees there because of high turnover rates.

    Here in U.S., I personally know of 20-25 job openings in my division. We're hiring people to work on new contracts because we dont have enough consultants to fill those positions.

    I would say my company is a special case in this environment because we cut costs for other companies. Our customers are not just U.S. companies but all over the globe.

  11. Jayhawk1 you are in china aren't you?

  12. I live near albany, ny. Not too bad yet, but the area is has a lot govt and pseudo govt jobs.

    Can you or someone who posts here tell me where I can find charts of the amount of govt debt outstanding by maturity as of today. Also, I would like to see the same thing for 6 months ago and 1 year ago.

    I have heard of the all the recent treasury auctions, but I would like to visually see the impact by maturity.


  13. I think we see a retest of Nov. lows soon. What are others thinking?

  14. Just found the source data I was looking for at treasury direct.

    Marketable: Jan 31, 2008 Jan 31, 2009 Change
    Bills 984,388 1,798,563 82.71%
    Notes 2,503,949 2,826,009 12.86%
    Bonds 558,537 594,641 6.46%
    Tips 472,013 516,703 9.47%
    Fed Fin Bank 14,000 14,000 0.00%
    Tot Mrktble 4,532,886 5,749,916 26.85%

    Domestic Series 29,995 29,995 0.00%
    Foreign Series 5,886 4,986 -15.29%
    R.E.A. Series 1 1 0.00%
    State and Local 286,451 244,800 -14.54%
    US Savings Sec 195,690 193,810 -0.96%
    Govt Acct Ser 4,181,707 4,406,044 5.36%
    Hope Bonds 492
    Other 5,392 2,037 -62.22%
    Tot Nonmrkt 4,705,122 4,882,164 3.76%

    Tot Pub Debt
    Outstanding 9,238,008 10,632,080 15.09%

    What's this new line called "Hope Bonds." I think they need to expand that line to infinity.

  15. Jayhawk1 - I agree on re-test of Nov. lows. This market is weary of holding itself up on media conjecture.

    guru1 from MW

  16. I work in the pharmaceutical business for one of the biggest names. Layoffs are hitting us left and right.

  17. i was a siding sub contractor, for new single family homes. all trades, trim carpenters, plumbers etc. nada. FDR , your 15% is alot closer to real , than the BS gov #'s.

  18. Hi

    I know a person "in the kow," so to speak, at Microsoft. I've been informed that there will most likely be two to maybe even three rounds of lay-offs in the future.

    I also have no doubt Google will be laying off more people.

    PS - Thanks a bunch for writing this! I'm almost caught up on all the posts now, except a few in Jan.

    shortsweetsimple from MW

  19. I own a remodeling company in the Philly area. In 06 we had 10 people in the company and now we have 3. Our niche was large high end remodels. We were hit sooner than others because our niche collapsed first. Now it is like a plague hit town.

  20. My company has laid off over 50% of the workers here in Phoenix, AZ. Things are still looking somewhat okay for many businesses but for some, i.e. construction related, you-know-what is hitting the fan.

    I feel lucky to have a job right now. Just to hedge my position I've sent out some resumes to see what kind of response I would get and have had very little response. That is very disheartening considering my experience.

  21. I am an executive at an IT consulting firm. 2008 was our best year ever. 2009 is shaping up to far exceed that. The opportunities for best of breed companies in IT are the best since 2001.

    That said, I wish the government would do whatever it is going to do and then get off the stage. So many people are on the sidelines because they don't know what the playing field will look like.

  22. in my area (FL) $25hr jobs are now $13k an hour if you can get them, craigslist carries ads offering to exchange items for 2 week food supply. Personal ads are explaining what women will do just for a night out ! The Tourist trade: figures are down 25% on occupancy levels compared to last year. gas prices are $2/gal . commerical real estate has many problems finding new tennants. food prices rising a bit.....

  23. I ran a business in a major ski resort town in the Rocky Mtns. until about a year ago. I got out partly because of what I was learning from FDRAOA among others, I was expecting a major downturn. I recently learned that businesses there are experiencing 40-60% decline in business this year. We're just at the beginning of this and most people are still in denial.

  24. I'm in Buffalo NY. One of the most seriously depressed USA economies for decades running. Our housing went up probably 50% during the boom recently but the jobs really didn't change. There's precious little here. Housing prices driven by the easy lending. Housing prices are steady and hanging on here for the time being as people hope the economy will improve. Only a few are getting desperate and lowering their prices. I expect more to follow. Times have been hard here relative the rest of the nation for years and nothings looking to get better. NYS taxes are brutal and the states in terrible economic shape. Food prices went up with the diesel/gas prices and haven't gone down as diesel prices moderated. I'm a fireman so hope my job is secure but I'm not without worry too. These are stressful and worrisome times all round. I know many who lost 40% or more in their investments the last year so everybody is hurting and many are holding on hoping things will fix.

    curvecrazy from MW

  25. quote: We're just at the beginning of this and most people are still in denial.

    ...I see the last two posts cover this issue, most people are just too comfortable and passive to accept what has happened and what the politicians are doing to make it much worse.

    Lots of people holding onto stuff they really need to sell in the vain idea that it will be worth more later. I have lost interest in buying a car recently when the owner finally came down to my price because frankly I have cold feet about this economy. The seller might have got what I offered had he acted much more swiftly and decisively.

    If you want to unload something, do it before the money supply completely dies off.

  26. Had a thought...many, many on MW and other boards are against the deflation scenario...but after reading Financial Armageddon's US bankruptcy numbers (a'la social security/healthcare), and the inescapable fact that millions of baby boomers will be retiring and soc sec will have to disappear in the form we know it now...

    What else can we have but deflation due to reduced demand for goods and services??? For years!

  27. It isn't just a social security problem for boomers.

    Thousdands of companies have promised baby boom generation pensions and healthcare coverage in their retirements. These companies are not going to be able to keep those promises, especially now that they lost a good portion of money thru SIV, CDO, MBS, or other mark-to-market securities created thru housing bubble.

    After we throw all these money at the banks, all $3 trillion of it, we won't have the debt capacity to guarantee social security or bail out pension funds.

    Smart as the bankers are they made sure they get the bail out money before social security hits the fan.

  28. FDR. A quick question, the answer to which I suspect many here will benefit from.

    You mention shorting gold based on your assessment that deflation will deflate the price while the actual value increases.

    I see there is an ETF [GLL] that would allow you to short gold. In past discussions you have indicated these ETF's are losers because of the exorbitant costs. Is there a better way to short gold? Am I not already shorting gold by being in $USD cash? Would actually shorting gold benefit me at all or would I be better to stay in cash as it continues to gain value?

    I'm getting more and more scared as time goes along and I have less and less belief the gov't can do anything but make this worse. I'm not totally sure what to do and taking risks seems less prudent as time goes along. I even feel any monies I can protect will likely be taken from me by thugs if things progress as I suspect they may.

  29. BTW... This blog is wonderful and thank you for all you do providing it. Your efforts are much appreciated. I truly value your incites. George

  30. FDR do you still believe that investors should be in 100% treasuries?

  31. FDR

    You have been right on so many things, but I feel your predictions for PM's is delusional.

    Do you still feel the price of gold is going to come down?

  32. Has FDR left the building? No comments in 6 days.

  33. Good luck to all who shorted gold at $840 and silver at $11.50. Glad I didn't....too bad I sold my PM at $30K loss....I've have $20K back today if I kept it. Obviously, I don't have a clue....just goes to show what a panic buy in July followed by panic sell in Dec can do for one's bottom careful.

  34. FDR? Black helicopters flying over head?

  35. Well as the market gets hammered today (DOW down 250 points), people seem to be treating both treasuries and gold as a safe haven.

    FDR's metaphor of people lighting their currency on fire as we have debt destruction, means that assets that are priced in that currency will go down in price - it's a simple matter of quantify of currency vs quantity of asset.

    I think there can be only two exceptions to that.

    1) one exception during the downturn is if there's a bubble in one of the assets. In which case, does the bubble become permanent, or does it eventually pop? For treasuries or gold to payoff this means their value as a safe haven (that they're providing insurance against) pays off. If gold pays off, it means we're in the dark ages and other forms of currency are defunct. If treasuries pay off, it means we're in depression (but fortunately not dark ages) and the currency is still redeemable.

    2) the only other alternative would be if monetary inflation takes hold, such that the volume of currency increases, thus increasing the price of all asset classes. We're obviously not seeing that. Von Mises argument is that we won't see this until the amount of debt creation exceeds the amount of debt destruction. And FDR's argument is that this is a lot more difficult for the public sector (gov) to pull off compared to the private sector, since the private sector can lever debt at 10:1 and higher, while the gov can only lever debt at 1:1.

    Gold pays off in the 2nd scenario as well. So I guess from that perspective, gold acts as a hedge against two outcomes: inflation and dark ages. I think the question though is what is the probability of those two outcomes, compared to the outcome of a deflationary depression where the .gov and the .fed survive intact (in the sense that the treasuries and currency issued by both are still redeemable). It's this latter outcome that cash and treasuries pay off.

  36. Hello everybody!

    First of all: FDR, thanks for the blog. Awesome!

    Second: I would like to make a brief comment on the gold price. At first glance, it may seem unfavourable to the case of the deflationists out there that the gold price is trading in the upper 900's. HOWEVER: This has NOTHING to do with hyperinflation. Why that is? Because the dollar is gaining huge grounds vis-à-vis all other major currencies. This allows for only two conclusions:

    1. We are not even near to hyperinflation, otherwise the dollar wouldn't continue to become stronger and stronger all the time.


    2. The whole world's hyperinflating and we are doing so at the slowest tempo.

    IMO, both conclusions are equally possible and don't necessarily exclude each other. BUT: in any event, both conclusions lead to the consequence that the goldprice will fall.

    in scenario 1 it is obvious, as we are in an enourmous recession / depression with prices falling. Only a hyperinflation could prevent prices from falling.

    In scenario 2, where the US inflates slower than other countries, the gold price also has to fall, as it is denominated in USD and the USD gains against other currencies.

    It is really that simple. Gold is coming down. Definitely. Only question is: from 1000 USD or from 1500 (absolute max.). Only thing that matters: Gold price is the current bubble.

  37. Why has the price of dollars got anything to do with inflation or deflation in this scenario. Right now, the world wants cash, as cash is good. The banks want it, we want it, the government want it. They all want it, and there is much less available in terms of how much things are priced. As most things as priced in dollars, and there is a fire sale going on, then the demand for dollars is huge. As the world's reserve currency, it is in more demand than any other. Therefore, the price of dollars goes up. It is this which is driving the cost of buying dollars rather than inflation or deflation.

  38. Hi all,

    On the gold price, my definition of a bubble is anything that moves counter fundamental preferably in mania fashion, i.e. what Elliott would call a wave 5 of some degree, or even more so, a B wave. Gold fits both those descriptions.

    It is often discussed here so I know people have mixed and/or conflicted opinions, and I understand that because of this, many people want to hear more about it.

    I'm not opposed to discussing it, as gold is a very interesting topic but I just don't lose any sleep on this one because I don't think I'm wrong (who does?). I hope that doesn't come off as uninterested, but I think it is a great short at these price levels. Does that mean it can't go up some more, no, but I also recommended shorting it at $985 to those who would listen, and that was a far more difficult call to make as the 75 year inflationary uptrend was still in place if not stronger than ever. So I hear all the opposing viewpoints and I love to read them, but basically nothing could make me change my mind that thousands of years of predictable price action is invalid.

    True, physical gold in the bedroom closet could turn out to be good catastrophic coverage, I've always agreed that is a good idea, even when I recommended shorting gold at $985. But that is not a strategy to make money, just like buying catastrophic-anything insurance is often a good idea, but not to make money.

    So we need to distinguish between a good hedge and a good trade:

    If you believe gold is a good hedge against systemic failure, then you should buy it to lose money. That is how all insurance works - it costs, unless the bad thing happens and even then you lose something, just not everything.

    If you believe it is a good long trade, then you have to make a case that something has reversed 1000s of years of price action where gold goes up in price during inflation and down in price during deflation. Or, make the case that prices plunging across all asset classes is inflationary.

    As most know, I disagreed with the perpetual inflation theory since I first started trading systemic deflation in early 2007, shorting basically everything in the order of highest leverage to least leverage. Not only do I think that is still a valid stance, I think we have only just begun to de-lever prices.

    The good and bad thing about such a huge event is (good) there is a ton of money to be made for a long time, and (bad) we are very small standing next to it, so typical noise levels can add up to very large swings against against the trend.

    The answer is to stay focused on the macro trend while not exposing yourself to too much leverage. Basically, to do the opposite of what worked for the past 75 years, you want to "sell and hold" in diversified fashion at regular intervals to dollar cost average your cost basis higher.

  39. My previous "sell and hold" remarks are aimed at those crazy enough to try to make money from a train wreck they are part of.

    The smart move continues to be capital preservation via treasuries - which last year alone bagged a 100% return in buying power with very low risk. That is hard not to recommend, which is why I recommended it over a year ago.

  40. FDR What about all the Printed money coming out of the FED, surely that's a recipe for inflation down the road?

  41. Not a recipe for deflation. Very much deleveraging going on. Currency going poof means that remains is more valuable and that's deflation.

  42. Sorry, I meant not a recipe for inflation in the comment above... we are going strongly into deflation. fwiw My fingers went faster than my brain!! LOL


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